International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
Credit Policy and Performance of Loan Portfolio at Pride Micro Finance Uganda Ltd
Obadia Kamugisha*, Abas Rutaro School of Graduate Studies and Research, Team University, Plot 446, Kabaka Anjagara.rd, P.O Box 8128 Kampala-Uganda *Corresponding Author
Abstract:-The bad effects of performance of loan portfolio are background of the study, statement of the problem, general undesirable and the researcher investigated on how the credit objective, specific objective, research questions, the policy if properly managed could offer a means of changing this hypothesis, the scope, the significance and justification of the situation. . Poor loan performance exposes high level of credit study. risks and affects loan interest repayment, principal payment and profitability, which if not checked can result into depletion of the 1.1Background of the study capital base and closure of institutions hence loss of share holders equity. This study will therefore seek to examine the Performance of loan portfolio continues to attract attention to effect of credit policy on performance of loan portfolio at PMF scholars and policy makers due to the long reputable need for Uganda Ltd in order to generate recommendations that will help credible Micro Finance Institutions (MFIs). Some empirical micro fiancé institutions attain improved performance of loan evidence has shown that in most emerging economies, MFIs portfolio. The researcher used a combination of descriptive, have brought millions of people into cohesive financial quantitative, cross sectional and survey design. The target institutions which are succeeding very well in providing population was 100 from where the sample of 80 was sampled financial services to its members for improving their standards using Morgan tables and the study employed both simple random sampling and purposive to collect primary data with use of living (Collier, Katchova, & Skees, 2011 Collier, B., of the questionnaire. Findings indicated that credit terms Katchova, & Skee, (2011). loan performance is related to contribute to better performance of loan portfolio at PMF issues of over-indebtedness emerging among micro finance Uganda as shown by r=0.825 and adjusted R square of 66.9%. customers. Micro finance institutions aim at maximizing the Also it revealed that credit standards have a significant influence return to a portfolio while keeping the risk within the on performance of loan portfolio at PMF Uganda and finally acceptable bound (Van der Maas, 2006). This maximization findings revealed that credit collection procedures affect requires the balancing of highly repayment rates, low arrear performance of loan portfolio at PMF Uganda as shown by rates, low default ratesas well as low portfolio at risk. r=0.776 and Adjusted R square of 58.9%, r=0.65 and Adjusted R Unfortunately for Ugandan case MFIs suffer from poor credit square of 40.3% respectively. All this indicate that these findings answer the general objective of assessing the effect of credit policies and weak risk management practices according to policies on performance of loan portfolio of PMF Uganda. The association of micro finance institutions in Uganda report study recommends that PMF should extend the loan repayment 2014. Loan portfolio are the major assets of MFIs and various period to at least 12 months instead of mandatory 10 months, studies have been undertaken as regards to this, for example there should be friendly credit standards and lastly Credit performance of loan portfolio by (Gonzalez- Vega 2003); and officers should personally make physical visits to customers’ an international conference on best practices in rural finance, premises. Washington DC, 2-3 June, 2006. Other studies include the LIST OF ABBREVIATIONS effects of direct payments on liquidity and repayment capacity of farmers by Qinlan & Izumida, 2013; Determinants of CSF: Centre for study of financial institutions repayment performance of group lending in China an PMF: Pride micro finance evidence from rural credit co-operatives and program in Guizhou province web of science R. MFI: Micro finance institution F : F ratio calculated Micro finance institutions in Uganda have tried to exploit the c benefits of the diversification. However there has been no Fr: F ratio read method of measuring the actual amount of diversification in a I. GENERAL INTRODUCTION debt portfolio thus its not surprising that there have been many unexpected default events in MFI’s portfolios in the last 1.0 Introduction 10years Bank of Finland annual report and corporate governance report 2013). The poor are usually excluded from The study aimed at establishing the effect of credit policies on credit facilities because of many reasons which include performance of loan portfolio in micro finance institutions in insufficient collateral to support their loans, high transaction Uganda; A case of Pride Micro Finance. In the study, credit costs, unstable income, lower literacy. Obamuyi, (2009). policy was an Independent Variable and performance of loan portfolio as a Dependent Variable. This chapter presented the
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International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
In Uganda there is continued deterioration of performance of 114.6billion to Ushs. 243.1billion between June 2013 and loan portfolio among MFIs which has prompted the June 2014. The sectors non performing loans (NPLs) grew by government to take several measures to improve on their Ushs; 48.2billion to reach Ushs; 116billions at the end of June performance yielding non despondence to positive results by 2014 thereby accounting for 22.8% of the total NPLs in MFIs (Eriku 2010). According to Association of Microfinance annual performance report year 2012 & 2013. Institutions in Uganda 2014, MFIs in Uganda are customer Pride Micro finance reviewed performance report between the focus finance institutions offering relevant, accessible and period that is 2012 & 2013 indicate a similar and interesting affordable banking products and services in refreshing manner situation which needs to be studied. The table below shows with a total of 514,214 borrowers and total loan of 612.52 plan projections. million US Dollars. However MFI’s loan grew from Ushs Table 1: Reviewed PMF performance trends between 2012 &2013
2012 Projections 2012 Actual 2013 Projections 2013 Actual Profits and loss (Uganda shillings 17.93 11.09 12.76 11.66 in Billions) Loan issued (Uganda shillings in 97.56 80.69 98.45 95.68 Billions) Customer deposits (Uganda 40.32 35.49 56.12 52.69 shillings in Billions) Source: PMF Annual performance report years 2012& 2013. The above concerns both at the national level and PMF in reputation and other consequences (World Bank 2007). The particular; The trend from the above table shows that PMF did amount of profit or loss projected was not realized and it fell not meet its target in form of loan issued and customer in actual terms by 38% in year 2012. Though in the year 2013 deposits suggest an important need for more empirical studies the corresponding figure fell by 8.6% showing an on the relationship between credit policy and performance of improvement in profit or loss position. The amount of loan loan portfolio. It is therefore upon this background that the issued projected was not realized and felled by 8.6% in actual researcher examined the relationship between credit policy terms in the year 2012. Though in the year 2013 the and performance of loan portfolio of PMF in selected corresponding figure 2.8% showed an improvement. branches in Kampala region. Customer deposit were not realized in the year 2012 with a shortage of 11.97% and the corresponding figure reduced to The trend from the above table shows that PMF did not meet 6.1% showing an improvement; these figures were calculated its target in form of loan issued and customer deposits. This is from the table of PMF annual performance report of 2012 and undesirable situation an indication of unsatisfactory 2013. PMF devises ways for example; physical visit to clients, performance hence a need to investigate whether this was who have failed to meet their contractual obligations, associated with credit policy in place. For clarity view the rewarded the best client who pay promptly and offer quick policy and strategic purpose the table reflect undesirable loan processing and increased loan sizes to those who comply situation necessitating an investigation to establish how credit with the contractual obligations. However all this done has not policy relate to portfolio performance. improved portfolio performance which is measured by the 1.2 Statement of the problem level of profits made. Poor loan performance exposes high level of credit risks and affects loan interest repayment, Performance of loan portfolio remains the major objective of principal payment and profitability, which if not checked can all Micro Finance Institutions all over the world. In pride result into depletion of the capital base and closure of micro finance it is no option, however the components of the institutions hence loss of share holders equity. This study will researchers study –return on investment, return on assets and therefore seek to examine the effect of credit policy on profitability of loan portfolio had poor performance in rural performance of loan portfolio at PMF Uganda Ltd in order to finance credit cooperative in China Gonzalex – Vega (2006). generate recommendations that will help micro fiancé The bad effects of performance of loan portfolio are institutions attain improved performance of loan portfolio. undesirable and the researcher investigated on how the credit policy if properly managed could offer a means of changing 1.3. General objective of the study this situation. The purpose therefore is intended to examine The general objective is to assess the effect of credit policy on the credit policy effects on performance of loan portfolio. The performance of loan portfolio at Pride Micro Finance Uganda existence of an effective credit policy is meant to ensure Ltd. performance of loan portfolio of any micro finance institution through increased number of borrowers while ensuring 1.3.1Specific objective of the study declining default rates. Like any other micro institution PMF i. To examine the effect of credit terms on performance has put in place credit terms, credit standards and credit of loan portfolio at PMF Uganda Ltd. collection efforts to the effect of avoiding damage and its
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International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
ii. To investigate the effect of credit standards on Central Division II; Nakulabye branch, Wandegeya, performance of loan portfolio on PMF Uganda Ltd. Kawempe, Nansana and Bukoto; Central Division III; iii. To determine the effect of credit collection Entebbe Road branch, Kabalagala, Nakawa and Mukono. procedures on performance of loan portfolio on PMF 1.5.3 Time scope Uganda Ltd. The period of the study time was between 2012 and 2013, 1.4 Hypothesis because it registered poor performance referred in PMF i. There is no significant relationship between credit annual performance report of 2012 and 2013. terms and performance of loan portfolio. 1.5 Significance of the study ii. There is no significant relationship between credit standards and performance of loan portfolio. i. The study would provide credit policy makers with iii. There is no significant relationship between credit the data flow for the organization. This study would collection procedures and performance of loan provide relevant data and information to the Pride portfolio. Micro finance and Commercial banks to act as reference if and when necessary. 1.5 Scope of the study ii. The study would stimulate more researchers on 1.5.1 Content scope performance of loan portfolio. This would allow policy makers and the government to generate This focused on effects of credit terms, credit standards policies in regard to the governing of the micro and credit collection procedures and how they affect finance institutions. performance of loan portfolio in selected branches of iii. The study is hoped to serve as a bench mark between Pride Micro Finance Uganda Limited. the past and the future studies on the subject. The 1.5.2Geographical scope study would provide literature to researchers and consultants as a study document at the library of The study was carried out from Pride Micro Finance (U) Team University and other institutions. Ltd and covered Kampala region, the region has 14 branches (indicated on Google map) Pride Microfinance 1.6 Conceptual frame work Kampala region and by Krejice and Morgan table 1970 The conceptual frame work showing the effect of credit the researcher took up 12 branches in the three divisions; policies on performance of loan portfolio Central Division I; City branch, Katwe and Nateete;
Independent variable (IV) Dependent variable (DV) Credit policies
Credit terms Performance of loan portfolio Interest rates Repayments rates Credit period
Credit standards Client standards Tight standards Loose standards Return on investment Return on asset
Credit collection procedures Profitability
Face to face reminders Telephone reminders
Email reminders Legal procedures Monthly deductions
Figure 1: Showing the conceptual framework on Credit policy and performance of loan portfolio Source: Adopted from Njeru (2001) and modified by researcher in (2018)
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International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
The conceptual frame work shows the relationship between 2.1.1 Portfolio theory credit policies and performance of loan portfolio in PMF Portfolio theory as developed by Fisher Black and Myron Uganda Ltd. The conceptual frame assumes that credit Scholes in 1973 investors to real investment and the option to policies which include credit terms, credit standards and credit use as much collateral as possible to make default side as collection procedures influence performance of loan portfolio much un attractive option as much possible. It provides the Van Horne et al, (2007) indicated that credit policy plays a banking institutions in general a strategy on how to diversify major role in directing performance of loan portfolio by the their loan portfolio and general investment. Before 1973, level of a company’s accounts receivables. He further argues banks and micro finance institutions had no alternative that sound lending procedures in retail financial institutions strategy on how to diversify to the maximum so as to involve selecting and identifying high risk applicants, minimize the risk and maximize the gain of their equity of the modifying loan conditions like security requirements and business. The theory of portfolio faces a low risk bond and monitoring repayments of post loans approved. However this makes high risk investments surer of profitability. In real objective conflict in credit unions where a balance between world, the theory explains the fact that when investments have institutions objective improving loan accessibility is reached equilibrium, the risk minimization has been achieved. compromised with members who want to get high life goals compared to the institution objective of viability through Micro finance institutions in Uganda have tried to exploit the reducing loan default rates. benefits of the diversification. However there has been no method to actually measuring the amount of diversification in 1.7 Operational Definition of key terms a debt portfolio thus it’s not surprise that there have been The key terms that operationally defined included the many unexpected default events in MFI’s portfolios in the last following; 10years (Bank Finland PLCs annual report and corporate governance report 2013). The poor are usually excluded from Credit policies: Refer to set of guidelines and criteria credit facilities because of many reasons which include developed by a microfinance institution and used by its insufficient collateral to support their loans, high transaction employees to determine whether an applicant for a loan costs, unstable income, and lower literacy (Obamuyi, 2009). should be granted or refused a loan. 2.1.2 Delinquency management theory Credit terms: Refer to contractual stipulations under which Pride Microfinance Institution grants credit to clients. The theory of delinquency management developed by Ledgerwood (1997) states that performance of loan portfolio Credit standards: Refer to bench mark criteria used by Pride improves in the presence of delinquency management Microfinance Institutions in selecting customers for credit. structure. The theory will strengthens the portfolio theory Credit collection procedures: Refer to efforts used by Pride and stipulates/ demands that delinquency management needs Microfinance Institutions to collect and recover loans given to comprehensive review of the lending techniques, operational customers. procedures and the company’s image as an MFI. The theory puts it clear that delinquency is often a result of poorly Performance of loan portfolio: Refer to the rate of profitability designed loan products and delivery mechanisms. or return on investments in the total loan products, thus it Ledgerwood in 1999 stated that profitability of MFIs is broadly looks at the number of clients applying for loans, how affected by interest, especially if interest revenue is not much they are borrowing, timely payment of installments, received on delinquency loans. And further warns that the security pledged against the borrowed funds, rate of arrears if significant effect on a loan would be if the principal amount is any and number of loan products on the chain not repaid and if so then loan provision must always be made. II. LITERATURE REVIEW For example once a loan is lost then other new additional loans should be made to generate enough revenue to 2.0 Introduction compensate for the lost loan capital. Equally saying a lost loan This focused on what other scholars and researchers have must be recovered, otherwise the situation is that the balance written in line with credit policies and performance of loan sheet position on equity records loss, it’s reduced resulting portfolio and their effort to meet the information gap. The into few funds not enough for loan financing. Therefore the review focuses on the published journals, text books, study focused on the PMFs credit policy of credit terms, credit publications and documents, magazines, organizations standards and credit collection efforts are used such that the financial report and previous research reports only limited to recovery rate of disbursed loans does not affect profitability the key variables under investigations. hence the theory was used to study how PMF credit policy affected its performance of loan portfolio. 2.1. Theoretical review Delinquency or simply crime is normally as a result of poorly This section assesses the theories that were applicable to this designed loan products and delivery mechanisms. It is argued study and these include; Portfolio theory and delinquency according to this theory that profitability of MFIs is affected if management theory. interest revenue is not realized on delinquent loans.
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International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
Accordingly the worst effect on profitability would occur if and loan portfolio segments which are sound and lending the loan principal is not repaid and if so loan loss provisions personnel must adhere to and ensure their applicability must be made. A loan provision means if a loan is lost then (Mishkin, 2012). new additional loan be made to generate enough revenue to MFIs performance is a function of an effective credit compensate for the lost loan capital. In other wards in an management system because their income is generated from event of a lost loan, the entire principal and interest must be interest earned on loans extended to their clients. A sound expensed through a loan provision made. Otherwise the management system creates stability on continued balance sheet provision of Equity is negatively affected. The profitability of MFIs while credit delinquency is the cause of recorded loss reduces Equity resulting in reduced funds poor financial performance as a condition. A carefully blue available for financing further loans. printed credited policy serves in the following areas; objective Verily the theory can be used to explain the effect of credit of credit extension, extension of the authority and policy on performance of loan portfolio. In the context of this responsibilities of credit granting, specification of training study, credit terms, credit standards, and credit collection policy for credit personnel, monitoring activities for credit procedures is comprehensively reviewed by any MFI in order staff and clear performance targets and all these aim at to minimize delinquency and improve PMF loan performance creation and retention of a customer- the company- customer in particular. The effective credit policy in form of perfect culture. The internal factor of the organization emphasizes on design of loan products and delivery mechanisms improve creativity, knowledge, and manipulation of existing performance of loan portfolio. information to enhance decision making rather than external borrowers character which may be a misrepresentation leading 2.2 Credit policy MFIs facing a multiple of challenges of high expenses, lower Credit policy is the major player on the level of a firms average revenues and low efficiency in terms of cost per accounts receivables considering the existing tradeoff between borrower (COSO, 1992). profitability and risk. Van Horne et al, (2007) indicated that 2.2.2 Credit policy and performance of loan portfolio credit policy plays a major role in directing performance of loan portfolio by the level of a company’s accounts Micro Finance Institutions apply a variety of policies to receivables. He further argues that sound lending procedures ensure good portfolio performance, whose aim is to achieve in retail financial institutions involve selecting and identifying asset quality, earning quality, low delinquency rate and self high risk applicants, modifying loan conditions like security sufficiency in regard to any given loan product. The general requirements and monitoring repayments of post loans policy and its effects on performance of loan portfolio is approved. However this objective conflict in credit unions viewed as follows; Institutions prefer to extend small loans, where a balance between institutions objective improving loan which are short term. This has side effects on loan officers accessibility is compromised with members who want to get because they cannot meet their targeted loan portfolio high life goals compared to the institution objective of requirements as cash flows on short term loans is lower viability through reducing loan default rates. though they ensure that borrowers access the amounts they can easily finance. 2.2.1 Performance of loan portfolio 2.2.3 Credit terms and performance of loan portfolio Mishkin (2012) noted that effective management of loan portfolio and credit functions are important to financial Credit terms are a set of policy actions designed to minimize institutions safety and soundness. Performance of loan costs associated with credit while maximizing the benefits portfolio refers to the rate of profitability or rate of return of from it, Anderson (2002). The objective is to achieve optimal an investment in various loan products. On a wider view it recovery of receivables as a firm follows a lenient or stringent encompasses the number of clients applying for loans, how credit policy. MFIs endeavor to have surplus financial much they are borrowing; timely payments of installment, balances. Credit issuing procedures must be followed to security pledged against the borrowed funds, rate of recovery achieve the institutions management credit terms. Ledger of arrears and number of loan products in chain for example Wood (2000) add that credit terms are just but part of a an automatic loan, over draft. general exercise to determine the extent of risk of each borrower. Therefore they should be designed to ensure that Management of portfolio is possible once financial institutions actions and facilities for repayments be seen as incentives or not only understand the risk related to each credit but how risk enforcement to compel repayments and must be ensured. on individual loans and portfolios are interrelated. To accomplish such knowledge the risk management board must On the other hand Pandey (2000) asserts that good credit ascertain the following; Portfolio composition and its inherent terms provide the institution with reasonable and adequate risk, product mix, industry and geographical concentration, return on loans and capital employed through efficient average risk rating, credit culture and risk profile. Therefore operations that generate resources to finance industry growth. once these are known, then the appropriate policies, processes Accordingly credit terms can be looked at to include length of and practices implemented to control individual risks of loans time to approve loans- that is the time between application of
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International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
a loan by an applicant to the time of a loan disbursement or irresponsiveness in payments and these need to be persuaded receipt. Normally measured by the position of the client as to do so. Meaning a strict collective procedures keeps debtors shown by ration analysis, trends in cash flow and just looking alert, reduces portfolio at risk and subsequently reduces losses at cash position. due to bad debts and ultimate increased profitability. 2.2.4 Credit standard and performance of loan portfolio On the other hand Centre for Study of Financial Institutions (2008); views procedures as a strategic activity and process in Credit standards (accessibility measures) are criteria to decide generating good habits and payment culture among clients. the type of customer for purpose of extending credit such as The centre sees these as business activity of generating returns capital adequacy and asset quality Pandey (1995). He further for the MFIs converting the would be losses into income, and argues that credit standards should be set on individual credit during this period the institution receives feedback on policies applicant by considering credit information, credit limits and themselves and activities in the lending cycle- promotion, default rate. He contends that an institution may have evaluation, approval, and disbursement. The collection period standards higher than what a good and reputable client can seen as an activity should be on going rather than sporadic offer. directed to all related parties, spouse, guarantors, family or According to Kakuru (2001), a firm should lower its quality friends who served as referees in accordance with client’s risk standards of accounts accepted as long as the profitability of profile and probability of repayment. the sales generated exceeds the added costs of receivables. Krestow et al (2012) puts emphasis on use of a variety of Credit standards must always be emphasized when advancing collection methods on unpaid accounts. Dickerson and Pandey loans, Werue (2012). He argues that this makes credit (1995) agree with Krestow et al (2012) that when determining provider gain a level of confidence of acceptance so that the the method to use, the cost and funds available for the purpose debtor is given maximum amount of credit with lowest cost must be put in mind, otherwise the collection cost may possible. According to Pandey (2001) credit standards can be increase and hence reducing the benefits due to the increased loose or tight. Loose credit standards may not mean increased expenditure levels. Such activities should be directed to profitability because they are associated with higher quicken recovery from slow payers and decrease bad losses, administrative costs. Kakuru (2001). Van Horne (2004) argues that the length of the period is Krestow et al (2012) argues that to achieve healthy, usually determined by the industry, culture, repayment habits sustainable growth MFIs should prepare collection strategies of clients and repetitive nature of borrowing. before launching a new product program or loan product. This Credit application appraisal is a key area of credit aims at avoiding a delinquent loan, creates proactive strategies management policies regarding credit standards Owusu to reduce debts overdue or zero them out. It makes aware the (2008). He asserts that application appraised cannot assess the public constituency of both internal and external existence of inherent credit risks when taking the right and appropriate an MFI staff ever prepared intentions to perform and deliver. credit decision though. Therefore the credit management Fisher & Siram (2002) provide a list of policies and statement should include essentials such as credit delivery procedures that contribute to a successful collection of process, credit portfolio risks, basis for pricing, management delinquent loans. of loan problem and all these have a bearing on performance 2.3 Summary of literature review of loan portfolio. The researcher noted that literature reviewed dose not 2.2.5 Credit collection procedure and performance of loan differentiate the applicability of credit policies in reference to portfolio financial Tiers in the banking sector between commercial Collection procedures provide a set of techniques used to banks and Micro Financial Institutions and in this regard, the collect accounts receivables revenue before they get overdue researcher observed that micro financial setting needed that (Van Horne 2009). Krest low et al, (2012) avails these the policies should fit to serve the social and economic techniques as follows; letters, telephone calls, visits by the environment grounded to the community’s grass root level. firms officials for face to face remainders and legal III. METHODOLOGY reinforcement. Of course, well designed procedure weigh the strength and weakness of the institution, addresses questions 3.0 Introduction such as whether collections should be done internally or This chapter presents the methodology which was used in the externally through a factor and whether staff is properly study. It describes research design, the study area and trained, motivated and evaluated. The study will be tailored to population, sample size and selection procedure, data establish the techniques of credit collection by PMF and the collection methods that was used and the respective data effect on performance of loan portfolio. Effective collection collection instruments, data management and analysis as well policy prompts payments and regular collections. The as steps that ensured validity and reliability of the study. justification is that not all clients are effective, others take things for granted, others forget, while there is culture of
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International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
31 Research design including the managing director, the head of credit department and the operations manager these have knowledge about The researcher used a combination of descriptive, credit policies and portfolio performance since they are quantitative, cross sectional and survey design. The cross among PMF’s decision makers. section design was preferred because it estimated the outcome of the interest of the study as selected from the whole 3.6 Data collection methods population of braches of PMF. This was further cost effective Data collection method used quantitative methods; these and timely. This case the researcher allowed intensive included both primary data and secondary data collection investigation and focused on the few cases of phenomenon of methods. And the research instruments adopted for the study interest. Quantitative approach helped to describe the situation were a questionnaire and studying documentary. as it prevailed giving relationships and the effects. 3.6.1 Questionnaires 3.3Study population Questionnaires were used because the researcher wanted The latest employ’s list from human resource of PMF was collect more data from a large number of respondents in a provided which showed the categories of these employees. short period. The questions were closed ended which allowed The study population comprised of 100 people and includes easy correlation and regression of respondents’ attitudes on managers and employees of PMF. Out of these 1 is the study of the independent and dependent variables. managing director, 12 were the heads of credit, 1 operation Questionnaires helped respondents fill them conveniently and manager and 36 were credit officers who provided relevant their views, opinions were done without compulsion or information which helped researcher access information on victimization as Sekaran (2003) observed. the 50 customers. 3.6.2 Documentary review methods 3.4 Sample size Sekaran (2003) considers this to involve collecting The sample size comprised 80 respondents, the sample size information from already written materials and the researcher was determined by Krejice and Morgan (1970) table as cited viewed documents relating to credit policies, loan compliance by Amin (2005).Purposive sampling targeted people who had reports, audited books of accounts and any document, memo knowledge on what the researcher intended to investigate, had on credit policies and performance of loan portfolio. served in PMF for at least 2 years and had enough information about credit policies, Random sampling was used since 3.7 Reliability and validity of research instruments Kampala region has many customers who were royal to it for 3.7.1 Validity the period of investigation and they were randomly picked without bias. Validity is the accuracy and meaningfulness of inferences Purposive sampling was applied on managers and head of which are based on results (Mugenda (1999).To ensure the validity of questionnaire as developed by the researcher, they credit sections. Random sampling was applied on credit were given to expert judges and the supervisors to determine officers selected from the roster at the head quarters according the relevance of each question in providing answers to the to each branch and every third officer would be selected question of the study. Such establishes an opinion, content of continually until the required number of 36 was arrived at. validity index (CVI) and as given by a formula; 3.5 Sampling techniques CVI = No of items declared relevant by judges Simple sampling was used on credit officers and purposive Total No of items on the Questionnaires was applied on Managers and head of credit officers, Simple random was used because it eliminates bias and ensures A score of 0.7 and above was accepted as Amin (2005) participants had equal chance of representation. Credit suggested. A test of CVI was conducted on the following officers and clients to participant were obtained from the head variables; credit terms, credit standards, credit collection office, their names were put on a Rota and randomly selected procedures and performance of loan portfolio and determined and general findings across all credit officers and clients were their content validity index given the number of questions, as ensured. Purposive sampling were applied to key respondents indicated by the table 2 below. Table 2: Sowing the Content validity index of the research questionnaire Judge1 Judge 2 Judge 3 Total Total Total CVI R IRR R IRR R IRR relevant irrelevant Credit terms 8 2 7 3 9 1 24 6 30 0.8 Credit standards 6 2 7 1 8 0 21 3 24 0.88 Credit collection 6 1 5 2 4 3 15 6 21 0.71 procedures Performance 5 1 6 0 6 0 17 1 18 0.94 Source: primary data (2018)
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International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186
3.7.2 Reliability of the Research Instrument IV. DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF FINDINGS Reliability refers to consistence or uniformity of measuring instruments (Sekaran 2003) and this was censured by handling 4.0 Introduction a pretest on 8 respondents. This was ascertained by running a This chapter presents the response rate, respondent’s bio data Cronbach Alpha test from where the researcher realized 0.82 according to highest level of education, work experience, and which was fit for the study. length of service into PMF. In addition, this section assesses Cronbach Alpha Number of items the data in relation to the research objectives. 0.82 34 4.1 Response Rate
Source: primary data (2018) Table 3: Response rate 2018
3.8 Data analysis Response rate Percentage (%) Data analysis involved closely related operations intended to Respondents 72 90 summarize collected data and organize them in a manner that Sample Size 80 answered the research questions (Amin 2005). Data was analyzed using the descriptive statistics with aid of statistical Source: primary data (2018) package of social scientists (SPSS). Different statistical Table 3 shows that 72 respondents responded to the study techniques included descriptive, correlation, regression which represents a 90% response rate that is above 50% hence analysis and ANOVA analysis. The upper level of statistical viable for this study. significance for hypothesis was 5% and was computed at 2- tailed level of significance. Pearson correlation co-efficient (r) 4.2 Respondent bio data analysis was used to determine the association between This section represents respondent’s bio data recording to the independent and dependent variables. The ANOVA analysis respondent’s highest education level, length of period with was done by analyzing the data by using a table of critical PMF and work experience. values for the F distribution. The critical values of F at the α (0.05) were applied and compared with the calculated. Table 4: Respondents level of education 3.9 Measurements of variable Education level Number of respondents Percentage (%) Data on respondent’s views and opinions about the study Diploma 28 38.9 variables were subjected to scaled variables from a self Bachelors 40 55.5 developed questionnaire as a result of extensive review of Masters 2 2.8 literature. A 5 point likert scale of SD = strongly disagree, D = disagree, N = not sure, SA = agree and A = strongly agree was Others 2 2.8 used to tap opinions on variables under investigation. N= 72 3.10 Ethical consideration Source: primary data 2018 The researcher obtained a letter from TEAM University to be In relation to the level of education of the respondents, the granted information from PMF. Permission was given and study findings revealed that majority had bachelors degree as access to respondents at PMF granted and briefed about represented by 55.5%. This was followed by those with objectives, purposes of the study and its relevance at large. diploma as given by 38.9%, then those with masters and Confidentiality of their responses and any doubt was cleared others with 2.8 and 2.8% respectively. before them as documents were filled. A letter of appreciation Table 5: Length of period with PMF was written to PMF. Length with PMF Number of Respondents Percentage (%) 3.11 Anticipated limitations Less than 2years 15 21 The researcher had anticipated to encounter a financial 2-6 Years 54 75 constraint as the data collection process was expensive however this was solved by soliciting funds from friends and ˃ 6 years 3 4 relatives that helped him to accomplish the data collection N=72 exercise and the study as whole. Source: primary data 2018 Further the study was limited by some respondent being The researcher also sought to understand the length of period biased in giving the information however this was overcome respondents had taken in PMF and the study findings revealed by ensuring confidentiality and anonymity of the respondent. that majority had spent 2-6 Years as represented by 75%, followed by those that had spent less than 2 years as
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represented by 21% and lastly those that had spent more than spent between 2-6 years in working as represented by 50%, 6 years as given by 4%. these were followed by those with less than 2 years as given Table 6: Working experience by 42% and lastly those of more than 6 years as represented by 8%. Period & working Number of respondents Percentage (%) experience 4.2 Empirical findings from the study 2-6 years 18 50 4.2.1 Performance of Loan Portfolio Less than 2 years 15 42 During the study, six statements on Performance of Loan More than 6 years 3 8 Portfolio were presented to credit officers at PMF, who were N=36 asked to provide their opinion on the performance of Loan Portfolio at PMF, results are presented in the table; Source: primary data 2018 The researcher further investigated the working experience of the respondents and the results revealed that majority had
Table 7: Responses on performance of Loan Portfolio
Std Performance of Loan Portfolio SD D N A SA Mean deviation Borrowers at PMF pay loans promptly 6(18%) 12(37%) 0 8(24%) 7(21%) 2.9 1.48 There are low levels of loan default at 20(60%) 2(6%) 1(3%) 4(12%) 6(19%) 2.21 1.65 PMF There is effective payment of interest on 13(40%) 10(30%) 0 8(24%) 2(6%) 2.27 1.35 loans by borrowers at PMF There is effective payment of principal by 22(67%) 4(12%) 0 2(6%) 5(15%) 1.45 1.57 the borrowers at PMF Profitability at PMF has improved as a result of proper loan payment between 26(79%) 5(15%) 0 0 2(6%) 1.39 0.98 2012 to 2014 Loan recovery at PMF is cost effective 12(36%) 15(46%) 0 2(6%) 4(12%) 2.12 1.3 Average 2.06 1.39
N=33 Source: primary data 2018 During the analysis the statement of respondents who agreed On whether there is effective payment of interest on loans by and strongly agreed, on the other hand those who disagreed borrowers at PMF, only 30% of the respondents agreed with and strongly disagreed were grouped as disagreed and the the majority of 70% on the contrary. The majority are not third group being those who were not sure. effective implying payments of interest rate on the loans by borrowers were not effective. This further explained by a high According to the above only 45% of respondents agreed that mean of 2.27 with a low standard deviation of 1.35. borrowers pay promptly, on the other hand majority 55% disagree implying that borrower do not pay their loan On the question of effective of payment of principal, only promptly. This has a negative effect on the institutions 21% of respondents agreed while 79% disagreed. This implies portfolio as evidenced by a high mean of 2.9 and a standard that few loan clients are in position to pay the principal as deviation of 1.48. indicated by a lower mean of 1.45 and a slightly higher standard deviation of 1.57. Asked whether there is low level of loan default at PMF, only 29% agreed while 68% disagreed and 3% were not sure. The The researcher further assessed whether the profitability at above findings were provided by a credit officer who said PMF has improved as a result of loan payment in the period, “The default rate is very high; in fact this has led to strict 21% of respondents agreed while the majority 79% of attention of group loans because most customers have been respondents disagreed which implies that ineffective defaulting and very hard to control”. This means high default repayment of loans has affected profitability of PMF. This is rate was responsible for strictness on how members of a group further explained by a low mean of 1.39 and the standard pay their installments, which affects performance of loan deviation of 0.98. portfolio. This is further explained by a high mean of 2.21 and Asked whether loan recovery at PMF is cost effective, only a standard deviation of 1.65. 18% of the respondents agreed compared to 82% who disagreed. This implies that the loan recovery cost is
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inefficient as much incomes are incurred in recovery the 4.2.2 The effect of credit terms on performance of loan loans. This is further supported by a credit officer who was portfolio at PMF Uganda quoted saying “We make so many calls reminding the debtors During the study, ten statements were presented to and sometimes make spot visits hence making a substantial respondents who ranked them according to the level to which expenditure on the side of the institution”. This is further they agreed or disagreed with them. During the analysis explained by a higher mean of 2.12 with a lower standard respondents who agreed and those who strongly agreed were deviation of 1.3. combined to a category of agree.
Table 8: Responses on credit terms and performance of loan portfolio
Statement SD D N A SA Mean Std deviation PMF has credit terms in place 0 0 0 35(48%) 37(52%) 4.51 0.5 The credit terms are clear 4(5%) 2(3%) 2(3%) 37(51%) 27(38%) 4.13 1.0 The interest rates charged by PMF are appropriate 4(6%) 12(17%) 3(4%) 24(33%) 29(40%) 3.86 1.26 The repayment schedule is flexible 0 42(59%) 5(7%) 25(34%) 0 2.72 0.94 The loan repayment period is adequate 6(8%) 6(8%) 2(3%) 32(45%) 26(36%) 3.92 1.21 the collateral for accessing loans is manageable 5(7%) 10(14%) 1(1%) 27(38%) 29(40%) 3.9 1.26 The loan amount given is always enough to meet business 5(7%) 2(3%) 1(1%) 37(51%) 27(38%) 4.1 1.06 needs of a client The waiting time until the client receives a loan is short 2(3%) 5(7%) 2(3%) 27(37%) 36(50%) 4.25 1.0 The benefits of a loan outweigh the expenses associated with 1(1%) 3(4%) 1(1%) 30(42%) 37(52%) 4.38 0.82 it The processes of acquiring loan is smooth 4(5%) 10(14%) 1(1%) 27(38%) 30(42%) 3.96 1.22 Average 3.973 1.03
N=72 Source: primary data 2018 Results from table 8 indicate that PMF has credit terms in The repayment schedule is flexible only 34% of the place as shown by 100% in agreement. This is further respondents agreed while majority 59% disagreed and 5% explained by a mean of 4.51 and a lower standard deviation of were not sure. This was due to the fact that’s when a client 0.5 which implies that there are credit terms in place in the accessed a loan, he/she is given fixed dates on which to pay institution. back the loan installments. With the majority disagreeing, it implies that the repayment schedule is not flexible as shown In addition, 89% of respondents agreed that credit terms are by a lower mean of 2.72 and low standard deviation of 0.94. clear, compared to 8% who disagreed while 3% were not sure. This was confirmed by the credit officer who had this to say Asked whether the loan repayment period is enough, 81% “Our credit terms are very clear, we normally explain to our agreed, 15% disagreed and 3% were not sure. In an interview clients all the terms of borrowing. One must have security a customer who agreed with the findings stated, “We are such as land, if one wants a business loan he must have an normally given a period of 12 months within which to pay existing business, a salary loan he must be employed with an back the money we borrow enough because we are able to appointment letter for an example”. This is explained by the make profits while paying back the money”. This conquers higher mean of 4.13 and a normally distributed standard with the mean of 3.92 which is slightly low and the standard deviation of 1.0. deviation of 1.21. Majority of respondents 73% further reported that the interest Study findings indicate that the collateral for accessing loans rate charged by PMF are appropriate while 23% disagreed is manageable. This was reported by 78% though 21% while 4% were not sure, this was supported by a customer disagreed while 1% was not sure. This was supported by a who said “When I accessed a loan of 3,000,000UGX I was client who said “the collateral they demand before giving the charged an interest of 10% equivalent of 300,000/= to be paid loan is manageable. They ask for land titles or agreement, within 10 months. I considered this to be fair because profits I vehicle log books and sometimes household chattels. make are more than 10% pay for interest”. This is explained Therefore if one has them is quickly given a loan”. This by a slightly lower mean of 3.86 and a slightly high standard supported by a mean of 3.9 and a slightly high standard deviation of 1.26. deviation of 1.26.
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The study revealed that loan amount given is always enough Results in table 9 shows the correlation (r) of 0.825** and its to meet business needs of a client supported by 89% significance 0.000 which is less than 0.05 level of respondents and while 10% disagreed, and 1% was not sure. significance. This implies that the credit terms significantly This was further supported by a slightly high mean of 4.1 and affect performance of loan portfolio and therefore they favor a normally distributed standard deviation of 1.06. customers who can afford to pay back the loans; performance of loan portfolio will also improve. In the same line the study found that the waiting time until the client receives the loan is short, as given by 87% in agreement Table 10: Regression analysis for credit terms and portfolio of loan compared to 10% who disagreed and 3% were not sure. This performance was supported by a higher mean of 4.25 and a normally Regression analysis was further done to determine the distributed standard deviation of 1.0 as supported by a credit strength of the relationship between credit terms and officer who said “If a customer fulfills all the requirements performance of loan portfolio as shown below. needed to access the loan, he/she is able to receive the amount Standard of money requested within less than a week”. Adjusted R Model R R square error of the square The study indicated that the benefit of the loan outweighs the estimate expense associated with it: this was accepted by 94%, only 1 0.825a 0.680 0.669 0.44286 5% disagreed and 1% not sure. This collaborates with earlier a Predictors (constant) , credit terms statement that the interest rate of 10% was affordable and that Source: primary data 2018 the customers were able to benefit from loan acquired. This is further explained by a higher mean of 4.38 and a slightly The table 10 above indicates that the coefficient of 2 lower Standard deviation of 0.82. determination (Adjusted R ) value is 0.669; this implies that credit terms explain 66.9% variation in performance of loan In addition the study found that the process of acquiring the portfolio. loan is smooth as reported by 80%, though 19% disagreed and 1% not sure. An officer supported this finding by saying “The Table 11: ANOVA Summary table for Credit terms process of accessing a loan is smooth because we only ask for Sums of Degrees of Mean F ratio collateral, passport photo, a national Identity card copy, and Squares freedom squares two guarantors with passport size photo each. If these are met Between 2127.62 40 53.19 0.0031 the client gets the loan in a period of less than a week”. The Within -153,736 9 -17,081.78 study findings are explained by a mean of 3.96 and a slightly high Standard deviation of 1.22. Total -151,608.38
The above findings indicate that if a customer provides for the Source: primary data 2018 requirement asked for, amount applied for within a short The Anova table above shows an F ratio of 0.0031<2.12 as period of time is given. given by the T-test table at a critical value for the level α=5% Table 9: Correlation coefficient for credit terms and performance of loan with the degrees of freedom 9 against 40. Since the Fc www.rsisinternational.org Page 194 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 During the study, it was found that credit standards of PMF Table 13: Correlation coefficient for credit standards and performance of loan were set basing on the borrowers individual credit information portfolio revealed by 92% of the respondents. This was confirmed by The correlation coefficient for credit standards and the head of credit that had this to say “We provide credit to performance of loan portfolio was to establish whether there is our customers according to the information they provide and or no relation between credit standards and performance of we have business loans, school fees loans, agricultural loans, loan portfolio. salary loans. Therefore the loan provided depends on which the customer wants”. This is further supported by a high mean Credit Performance of standards loan portfolio of 4.15 and a normally distributed standard deviation of 0.95. Credit Person Credit standards at PMF are set according to the borrowers standards: correlation 1 0.776** Significant ( 2 default rate. This was supported by 62% while 37% disagreed tailed) 0.000 and 1% was not sure. A less mean of 3.43 and a high standard 72 deviation of 1.57 explain the above statement. N 72 Performance of Person In addition credit standards at PMF are set considering the loan portfolio correlation 0.776 1 borrower’s credit limits revealed by 89% agreed compared to Significant (2 10% who disagreed while 1% was not sure. The above tailed) 0.000 72 findings were confirmed by one credit officer who reported N 72 “when a customer has been defaulting, we don’t give him another loan, however if the customer has been paying back ** Correlation is significant at 0.05 level (2 tailed) the required installment in time, we give him another loan Source: primary data 2018 whenever he applies for one”. This was supported by a mean In table 13, results show that the correlation coefficient 0f 3.43 and a slightly higher standard deviation of 1.57. This 0.776** and its significance level 0.000 which is less than shows that customers who pay promptly easily get loans, 0.05 level of significant. Implying that credit standards relates while those who default are not given more credit. significantly to performance of loan portfolio. Thus the The researcher investigated whether credit standards at PMF finding showed that improvement in credit standards are set considering the borrower’s credit limit and this was positively and significantly relate to performance of loan supported by 89% in agreement, 10% disagreed while 1% was portfolio. not sure. This is in line with the credit officer who had this to Table 14: Regression analysis for credit standards and portfolio of loan say “So long as the client can give the institution a security performance for the applied loan, then whether standards are tight or loose, the institution gives the loan”. This is supported by a Regression analysis was further done to determine the high mean of 4.25 and a normally distributed standard strength of the relationship between credit standards and distribution of 1.06. performance of loan portfolio as shown below. Standard Adjusted R Further, the researcher investigated whether in advancing Model R R square error of the square loans, credit standards must be emphasized to the borrower. estimate 94% were in agreement and 5% disagreeing. The findings 1 0.776a 0.602 0.589 0.49384 were supported by a high mean of 4.33 and low standard deviation of 0.83. a Predictors (constant) , credit standards Credit standards are emphasized in order to minimize default Source: primary data 2018 rate, the study further showed that PMF credit standards are The table 14 above shows that the adjusted coefficient of tight as reported by 90% of respondents while 7% disagreed determination value (R2) of 0.589 implies that credit standards and 3% was not sure as supported by mean of 4.28 and the explain 58.9% variation in performance of loan portfolio. standard deviation of 1 that is normally distributed. This confirms why 8% agreed that PMF are loose, majority 89% Table 15: ANOVA Summary table for Credit standards reported that credit standards are tight to ensure that there is Sums of Degrees of Mean F ratio minimum default rate disagreed while 3% were not sure with Squares freedom squares the mean of 1.93 and low standard deviation of 0.93. Between 4900.7 32 153.15 -0.0095 During the study it was established that credit standards set Within -113,383.5 7 -16197.6 are optimum as reported by 68% however 29% disagreed Total -108,482.5 while 3% were not sure as supported by a mean of 3.88 and a high standard deviation of 1.49. Source: primary data 2018 The ANOVA table 15 above shows an F ratio of -0.0095 < 2.31 as given by the T-test table at a critical value for the level www.rsisinternational.org Page 195 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 α=5% with the degrees of freedom 7 against 32. Since the Fc 4.2.4 The effect of credit collection procedures on Statement SD A D A SA Mean Std deviation PMF has credit collection procedures in place 0 0 2(3%) 30(41%) 40(56%) 4.53 0.55 The credit collection procedures at PMF are clear 2(3%) 4(6%) 1(1%) 26(36%) 39(54%) 4.33 0.96 At PMF, there is emphasis on strict collection 1(1%) 1(1%) 1(1%) 29(41%) 40(56%) 4.47 0.73 procedures At PMF, customers are reminded through telephone 2(3%) 1(1%) 2(3%) 27(37%) 40(56%) 4.42 0.85 calls to pay back the call At PMF, customers are reminded through letters to 19(27%) 28(39%) 3(4%) 9(12%) 13(18%) 2.57 1.45 pay back the loan There are regular visits by PMF’s officials to 1(1%) 1(1%) 3(4%) 41(57%) 26(37%) 4.26 0.72 customers for face to face reminder to pay the loan PMF uses legal means to make the customers pay the 9(13%) 4(5%) 3(4%) 37(52%) 19(26%) 3.68 1.26 loans Average 4.09 0.93 N=72 Source: primary data 2018 Results in table 16 shows that PMF has credit collection high mean of 4.26 and a slightly low standard deviation of procedures in place. This was supported by 97%of 0.72. respondents while 3% were not sure. This implies that there Further it showed that PMF has legal means to ensure that are credit collection procedures in place as indicated by a high loans are paid, this was agreed by 78%of respondents while mean of 4.53 with a low deviation of 0.55. 18% disagreed and 4% were not sure. The above results were The study further revealed collection procedures at PMF are supported by a credit officer who had this to say “Our credit clear as confirmed by 90% while 8% disagreed and 2% were collection procedures are very clear. Some customers send not sure. This is further explained by the high mean of 4.33 money using mobile while others bring it by themselves to the and a normally distributed standard deviation of 0.96. bank. For those who delay to pay we use face to face reminders, telephones, and in some instances legal Results further emphasized that there is strict collection procedures”. This is further explained by a slightly low mean procedures supported by 97%, 2% disagreed and 1% was not of 3.68 and a high standard deviation of 1.26. sure. This is elaborated by the high mean of 4.47 and a low standard deviation of 0.73. The findings indicate that PMF has various mechanisms it uses for credit collection procedures as indicated in the table At PMF customers, are reminded through telephone calls to below. pay back the loan. It was confirmed by 93%, only 4% disagreed and 3% were not sure. This is depicted in the high Table 17: Credit collection procedures mean of 4.42 with a low standard deviation of 0.85. Collection procedures Number of respondents Percentage (%) Client are reminded through letters (emails) to pay back the mechanisms loan as reflected by responses from 30% agreed while Face to face 36 51 66%disagreed and 4% were not sure. This is further explained Telephone 26 36 by a low mean of 2.57 and a high standard deviation of 1.45. Legal procedures 6 7 On whether there are regular visits by PMFs officials to Monthly deductions 5 5 customers for face to face reminders to pay the loan, 30% agreed, while 66% disagreed and 4% were not sure. This was Emails 1 1 in line the customer who had this to say, “There is no need for N=72 PMFs officials to visit our premises because reminding us, can be done conveniently through calling, spending SMSs and Source: primary data 2018 emails by use of telephones”. This is further explained by a www.rsisinternational.org Page 196 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 Table 18: Correlation coefficient for credit collection procedures and that there is exist a significant relationship between credit performance of loan portfolio collection procedures and performance of loan portfolio. Credit Performance of collection loan portfolio V. SUMMARY, DISCUSSION, CONCLUSION AND procedures RECOMMENDATION Credit Person collection correlation 1 0.650** 5.0 Introduction procedures : Significant ( 2 This chapter presents the summary, discussion and tailed) 0.000 72 recommendations of the study based on the research N 72 objectives. Performance of Person loan portfolio correlation 0.650 1 5.1 Summary of the study findings Significant (2 0.000 tailed) Findings indicated that credit terms contribute to better 72 72 performance of loan portfolio at PMF Uganda as shown by N r=0.825 and adjusted R square of 66.9%. Also it revealed that credit standards have a significant influence on performance ** Correlation is significant at 0.05level (2 tailed) of loan portfolio at PMF Uganda and finally findings revealed that credit collection procedures affect performance of loan Source: primary source 2018 portfolio at PMF Uganda as shown by r=0.776 and Adjusted The table 18 indicated positive relationship between credit R square of 58.9%, r=0.65 and Adjusted R square of 40.3% collection procedures and performance of loan portfolio as respectively. All this indicate that these findings answer the shown by 0.65 that is significant at 0.0000<0.05. This implies general objective of assessing the effect of credit policies on that credit collection procedures influence the performance of performance of loan portfolio of PMF Uganda. the loan portfolio. 5.2 Discussion of findings Table 19: Regression analysis for credit collection procedures and portfolio of loan performance 5.2.1. Credit terms and performance of loan portfolio at PMF Uganda. Standard Adjusted R Model R R square error of the square During the study it was revealed that PMF has clear credit estimate terms aimed at minimizing costs. This was supported by 1 650a .422 0.403 0.59521 Anderson (2002) who contends that credit terms are designed to minimize costs associated with credit which maximizes the a Predictors (constant) , credit collection procedures benefits from it. Further the study shows that interest rate Source: primary data 2018 charged by PMF is appropriate especially for clients who have From the table 19, R value of 0.650 represents a simple stable business. However customers who face challenges of sample correlation which indicates a high degree of business shocks find it hard to pay 10% monthly. This agrees correlation. The R2 value indicates how variation in the with Calvin (2009) who asserted that high interest rates, dependent variable portfolio of loan performance can be absence of grace period set by MFIs are seen as exploitative explained by the independent variable credit collection and very self serving to the MFIs and contribute to the procedures. In this case 40.3% variation in the portfolio of increased loan default. loan performance is explained by credit collection procedures According to the study findings, the repayment schedule is not and is relatively large. flexible, and that the loan amounts are inadequate. Customers Table 20: ANOVA Summary table for Credit Collection procedures are expected to pay back loan installments at the end of every month for individual loans and weekly for group loan Sums of Degrees of Mean F ratio borrowers. This is so in line with Calvin (2009) who observed Squares freedom squares those weekly repayments and the mandatory weekly meetings Between 3136.74 28 112.03 -0.0059 affects customer’s ability to make adequate profits from the Within -113,992 6 -18998.67 loan money and they are unable to pay back the loan within Total -110,855.26 the required period of time. This was further supported by Mugo and Otuya (2013) who observed that lack of flexibility Source: primary data 2018 in terms of loan repayment affects profitability and that most clients gain less from the loans they acquire. The ANOVA table 20 above shows an F ratio of -0.0059 < 2.46 as given by the T-test table at a critical value for the level Study findings further indicate that collateral for accessing α=5% with the degrees of freedom 6 against 28. Since the Fc loans is manageable. PMF needs land titles, and other assets www.rsisinternational.org Page 197 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 revealed that the waiting time until a client receives a loan is face reminders, phone calls, legal procedures, monthly short, notably less than a week. Van Horne (2004) supports deductions and others. Krestow et al (2012) supported such a this; he contends that the length of the period which is view and stated that well designed collection strategies weigh normally determined by the industry customs, repayment the strength or weakness of the institution addressing general habits of clients, and the level of repetitive borrowing should questions such as whether collections should be handed not be too long. Shorter periods are preferred because clients internally or externally, through third party as well as who default frequently generate bad debts and these are losses considering what measures should be in place to ensure staff which can be checked before it is too late to take corrective is properly trained, motivated and measured. In this regard, measures. This was further supported by Khemraj and Pasha most collections are done internally by credit officers; legal (2014) who asserted that good credit terms provide the procedures are often used after the collection has become institutions with reasonable and adequate return on loans and difficult and faced to pay back the loan. capital employed- return on investment. The fact that PMF puts emphasis on strict collection 5.2.2. Credit standards and performance of loan portfolio procedures indicates that there are efforts to recover loans and minimize default rates. This correlates with Dickenson et al According to study findings, PMF has credit standards which (1995); that asserts that an effective collection policy ensures are set basing on borrower’s individual credit information. prompt payment and regular collection. This enable PMF select customers for credit. Further the study shows that credit standards at PMF are set considering the 5.3 Conclusions borrower’s default rate. The above findings are in line with 5.3.1 Credit terms and Performance of loan portfolio Pandey (1995) who noted that credit standards should be set basing on individual credit applicant, consider the credit According to the study findings, credit terms contribute to information, credit limits and default rates. Thus a customer better performance of loan portfolio through the interest rate whose information does not qualify for these is not accepted. charged, repayment rates and credit period. Such position collaborates with Owusu (2008) who asserted that customers are evaluated to see if they meet standards of 5.3.2 Credit standard and performance of loan portfolio management before loans are extended to them. Kagwa It was again concluded that credit standards has a significant (2013) contend that clear credit standards enable MFIs to effect on performance of loan portfolio. This conclusion was select customers who are able to pay back loans acquired. based on Pearson credit coefficient which allowed a strong positive correlation between credit standards and performance In advancing loans, credit standards are emphasized to customers. This is so to ensure that borrowers understand the of loan portfolio. terms and conditions which must be adhered to before and 5.3.3. Credit collection procedures and Performance of loan after acquiring a loan. This view is supported by portfolio Werue,(2012) who stated that in advancing loans ,credit standards must be emphasized such that the supplier gains an Credit procedures affect performance of loan portfolio basing acceptable level of amount of credit at the lowest possible on the appropriateness of the method used. This shows that cost. strong credit collection procedures contribute to improved performance of loan portfolio. Additionally the study found that credit standards at PMF are tight which further explains why most respondents revealed 5.4 Recommendations that credit standards are not loose. Pandey (2008) says that The study recommends that PMF should extend the loan tight credit standards make a firm lose a big number of repayment period to at least 12 months instead of mandatory customers and when credit standards are loose the firm gets an 10 months. This will reduce on the amount of installment increased number of customers but at a risk of loss brought money paid per month and in turn allow customers adequate through bad debts. Relating this to Kakuru (2001) stated that time to pay back the loan. Microfinance institutions should lower quality standards of a account as long as the profitability of sales generated exceed The study recommends that PMF make its credit standards the added cost of the receivables. This is further supported by friendly by reducing the minimum amount of loan they can Emeok Pararia (2013) who suggested that there should be offer to at least 1,000,000/=. This will lead to increase of some degree of flexibility in the set standards to increase the customers and the performance of loan portfolio. In addition number of customers and that care must be ensured not to PMF should make credit standards loose in order to attract extend loans to bad customers. more customers. 5.2.3. Credit collection procedures and performance loan The study further recommends that PMF should stop relying portfolio. on making phone calls as a method of making customers to pay. This has a problem of not telling the truth by the client. Study findings indicated that PMF has clear and well designed Credit officers should personally make physical visits to credit collection procedures in place which include face to customers’ premises as this is more effective and a reliable www.rsisinternational.org Page 198 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 method that triggers customer to pay back promptly as Nigeria. Retrived from www.case.ox.ac.uk/conference 1st July 1995. opposed to phone calls. [8]. Eriku 2010, Eriku. J (2010) Government moves to recover loans from SACCOS. Retrieved from 5.5 Contribution of the study https://microfinanceafrica.net/news/[Google Scholar]. [9]. Gonzalez-Vega (2003) Deepening rural financial markets; This is a provision of first hand information on credit policy Macroeconomic, policy and political dimensions and performance of loan portfolio at PMF. It revealed that [10]. Imeok Pararia, L (2013); The effects of Loan Management on Performance of Nigerian Banks. The International journal of credit terms, credit standards and credit collection procedures management 2(1), 1-21 are key in improving Performance of Loan Portfolio of MFIs. [11]. Kagwa N.S (2013), Investment Rate, Loan Portfolio Performance Such findings increase PMF’s understanding on the extent to in Commercial Banks, A case Study Centenary Bank, Entebbe which credit policies influence performance of loan portfolio. Road Branch Uganda. [12]. Kakuru, J (2001), Finance and Business Division, Crown The information gathered can be used to design better credit Publishes Nakawa, MUBS policies to improve performance of loan portfolio at PMFs. [13]. Khemlaj, T, & Pasha, S, (2014) The Determination of Non Performing Loans, An Economic case Study of Guyana. MPRA 5.6 Areas of study page No 53128 [14]. Krestlow, Wamiam & Piano (2012). The challenges of Optimum Further research should be conducted on factors that affect Utilization of Credit, boosting recovery, economic research customer’s loan satisfaction at PMF. The study also bulletin. concentrated on PMF and this limits its appropriateness to [15]. Lagat, FK, Mugo, R & Otuya R (2013) Practices on landing Portfolio Among savings and cooperatives in Kenya. commercial banks since they may also be facing similar [16]. Ledger Wood J (1999) Access to Bank Credit in Sub Saharan challenges of credit policies and performance of loan Africa; Key issues and reform strategic IMF working paper, portfolio. As therefore further research need to be conducted Monitoring and Financial systems department Nairobi Kenya. in that area. [17]. Muganda, O. M & Mugenda, A.G (1991) Research methods; Qualitative and Quantitative approaches ACTS Publishes, Nairobi ACKNOWLEDGEMENT Kenya. [18]. Mishkin Fredrick. S. (2012) The Economics of Money, Banking The production of this dissertation has been a result of many and Financial Market people’s effort in particular my supervisor Mr. Abas Rutaro [19]. Njeru. B.W (2011) Assessing on performing Loans in Commercial Banks in Uganda, Fountain Publication. whose guidance I have based on to complete this research. He [20]. Owusu K. D (2008) “Credit Managing Policies in Rural Banks in read through, reviewed my work and ably directed me. I am Accra Ghana”. indebted to his constructive criticism, suggestion, guidance, [21]. Pandey (2000), Financial Management and Policy; 7th Edition tolerance, dedication and never “say die spirit” of the Landon [22]. Qinlan & Izumida, 2013 China Agricultural Economic Review, endangered non-potency researcher throughout the writing 5(3), 328-341.10.1108/CAER- 08-2012-0083[Cross ref]. and final supervision of this dissertation. Special appreciation [23]. Sekaran, U (2003) Research methods for Business, A skilled to Steven Ainebyona, your contribution to this publication Building approach (4th edition). John Willy & Sons, New York, counts. My special thanks go to the faculty of Humanities and USA. [24]. Sseanyana, S (2009), Paper on Building on Growth in Uganda. Social Sciences at TEAM University which without boundary [25]. Van Horne (2004). J. C; Financial Management Policy, Prentice- allowed me to access her ICT resources for theoretical and Hall of India. practical purposes. Need not to be left out is the entire [26]. Van der Mass. P (2006) Active loan portfolio loan management. management of Pride Micro-finance who supported me [27]. Wamasembe, (2012); Assessment of Lending Criteria of Deposit Money Banks in Nigeria. throughout my data collection process and their generosity in [28]. Warne, B. N (2012), Factors affecting loan Delinquency in accepting to participate in the study. Honestly, I need to Microfinance Institutions in Kenya, International Journal of acknowledge credit to authors cited in this report for their rich Management Science and Business research 1(12), 27-48. and well elaborated literature that assisted me understand the [29]. World Bank (2007), Performance Accountability and Combating Corruption. study further. [30]. Zikusooka (2004), Promoting Microfinance Institutions in REFERENCES Uganda. [1]. Amin, M.E (2015) Social Science Research; Conception, Methodology and Analysis. Kampala, Makerere University printers. [2]. Anderson S.R and K.P Burnam (2002), Avoiding pitfalls when using information. [3]. Calvin (2009) Consumer- Company Identification, a Frame work for understanding consumer relationship with companies. [4]. Centre for study of financial innovation- CSFI “Microfinance Banana Skins 2008- Risks in a blooming industry” 2008. [5]. Collier ,Katchova & Skees,(2011)Loan portfolio performance and El Nino, an intervection, Agriculture Finance Review. [6]. COSO (1992) Integrated internal control frame work Investopedia financial dictionary. [7]. Dickens et al (1995); Determinates of Small Holder Loan repayment Performance, Evidence, www.rsisinternational.org Page 199 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 APPENDICES Appendix A: Questionnaire for staff and customers Dear respondents I am a student at TEAM University under taking a study on the Effect on Credit Policies on Performance of loan portfolio in Microfinance Institutions case study PMF. The study is in partial fulfillment of the requirement for Master’s Degree in Finance. I kindly request you to answer the following questions and faithfully respond to this only academic purpose. No name is required and all information required will be kept confidential. Thank you for your kind cooperation Yours faithfully, Obadia Kamugisha Section A: General information about the respondent Level of education Diploma Bachelor’s Degree Master’s Degree PHD Others specify Length of time with the company Less than 2 years 2 to 6 years More than 6 years Working experience (applicable to staff) Less than 2 years 2 to 6 years More than 6 years Section B: Credit terms The following statements are designed to understand the credit terms at PMF Uganda. From your own understanding, indicate by ticking the most answer appropriate. 1 = strongly disagree, 2= disagree, 3= not sure, 4= agree, 5= strongly agree 1 PMF has credit terms in place 1 2 3 4 5 2 The credit terms are clear 1 2 3 4 5 3 The interest rates charged by PMF are appropriate 1 2 3 4 5 4 The repayment schedule is flexible 1 2 3 4 5 5 The loan repayment period is adequate 1 2 3 4 5 6 the collateral for accessing loans is manageable 1 2 3 4 5 7 The loan amount given is always enough to meet business needs of a client 1 2 3 4 5 8 The waiting time until the client receives a loan is short 1 2 3 4 5 9 The benefits of a loan outweigh the expenses associated with it 1 2 3 4 5 10 The processes of acquiring loan is smooth 1 2 3 4 5 Section C: Credit standards The following statements are designed to understand the credit standards at PMF Uganda. From your own understanding, indicate by ticking the most answer appropriate. 1 = strongly disagree, 2= disagree, 3= not sure, 4= agree, 5= strongly agree www.rsisinternational.org Page 200 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 1 PMF has clear credit standards 1 2 3 4 5 2 Credit standards at PMF are set basing on individual credit information 1 2 3 4 5 3 Credit standards at PMF are set according to individual default rate 1 2 3 4 5 4 Credit standards at PMF are set considering the borrower’s credit limit 1 2 3 4 5 5 In advancing loans, credit standards must be emphasized to the borrower 1 2 3 4 5 6 At PMF, credit standards are tight 1 2 3 4 5 7 At PMF, credit standards are loose 1 2 3 4 5 8 At PMF, credit standards set are optimum 1 2 3 4 5 Section D: Credit collection procedures The following statements are designed to understand the credit collection procedure at PMF Uganda. From your own understanding, indicate by ticking the most answer appropriate. 1 = strongly disagree, 2= disagree, 3= not sure, 4= agree, 5= strongly agree 1 PMF has credit collection procedures in place 1 2 3 4 5 2 The credit collection procedures at PMF are clear 1 2 3 4 5 3 At PMF, there is emphasis on strict collection procedures 1 2 3 4 5 4 At PMF, customers are reminded through telephone calls to pay back the call 1 2 3 4 5 5 At PMF, customers are reminded through letters to pay back the loan 1 2 3 4 5 6 There are regular visits by PMF’s officials to customers for face to face reminder to pay 1 2 3 4 5 the loan 7 PMF uses legal means to make the customers pay the loans 1 2 3 4 5 8. What are the commonly used credit collection procedures employed by PMF? ……………………………………………………………………….. ……………………………………………………………………….. ………………………………………………………………………… Section E: Performance of loan portfolio (applicable to staff only) The following statements are designed to understand the Performance of loan portfolio at PMF Uganda. From your own understanding, indicate by ticking the most answer appropriate. 1 = strongly disagree, 2= disagree, 3= not sure, 4= agree, 5= strongly agree 1 Borrowers at PMF pay loans promptly 1 2 3 4 5 2 There are low levels of loan default at PMF 1 2 3 4 5 3 There is effective payment of interest on loans by borrowers at PMF 1 2 3 4 5 4 There is effective payment of principal by the borrowers at PMF 1 2 3 4 5 5 Profitability at PMF has improved as a result of proper loan payment between 2011 to 2014 1 2 3 4 5 6 Loan recovery at PMF is cost effective 1 2 3 4 5 www.rsisinternational.org Page 201 International Journal of Research and Innovation in Social Science (IJRISS) |Volume III, Issue XI, November 2019|ISSN 2454-6186 Thank you for the response APPENDIX B: Documentary review check list 1. Credit Terms 2. Credit Standards 3. Credit Collection Procedures 4. Balance books of accounts 5. Profile of pride 6. Copies of agreement (for active loans to determine the loan terms) 7. Clients appraisal reports 8. Monthly loan recovery reports 9. Current loan portfolio report 10. Any other relevant documents APPENDIX C: Krejice & Morgan table 1970 www.rsisinternational.org Page 202